Appropriateness and feasibility of targeted diversification in a private equity portfolio

Appropriateness and Feasibility of

Targeted Diversification in a Private Equity Portfolio

By

KATHLEEN R. BROWNE

B.S. Electrical Engineering, Union College, 1988 J.D. Boston College Law School, 1993

Submitted to the Sloan School of Management in partial fulfillment of the requirements for the degree of

MASTER OF BUSINESS ADMINISTRATION At the

MASSACHUSETTS INSTITUTE OF TECHNOLOGY June 2006

ARCHVES

AUG

3 206

,LIBRARIES

© 2006 Kathleen R. Browne. All rights reserved.

The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part.

Signature of Author:

/

I

MIT Sloan School of Management May 12, 2006 I, Certified by:

'/

;

Accepted by:

Stephen J. Sacca Director, Sloan Fellows Program

, ~,,

Appropriateness and Feasibility of

Targeted Diversification in a Private Equity Portfolio

Kathleen R. Browne

Submitted to the Sloan School of Management on May 12, 2006 in partial fulfillment of the requirements for the degree of

Master of Business Administration

ABSTRACT

Diversification tools such as modem portfolio theory are used by institutional investors when making asset allocation decisions, which often result in an allocation to the private equity asset class. While some level of diversification within a private equity portfolio, in theory, should produce higher risk-adjusted returns, in practice it is problematic. Through a combination of quantitative analysis of historical private equity returns and qualitative analysis of the investment programs of several large institutional investors with long histories in private equity, the appropriateness and feasibility of targeted diversification is evaluated. The research indicates that the success of private equity investment programs is influenced more by the quality of the managers in the portfolio than by strategic design. Therefore, the ability of investors to access strong performing managers, and to choose not to invest when such access is not possible, is paramount. That said, institutions generally maintain some level of diversification in their portfolios. However, they often do so on an opportunistic basis or within a policy that affords them sufficient flexibility to overweight an area that offers the best expected returns.

Thesis Advisor: Antoinette Schoar Michael M. Koerner

Associate Professor of Finance Sloan School of Management

Table of Contents

I IN T R O D U C T IO N ... ... ... 4

2. DIVERSIFICATION IN PRIVATE EQUITY PORTFOLIOS ... 7

2.1. Traditional asset allocation ... 7

2.2. Asset allocation applied to private equity portfolios... 8

2.2.1. Ways to diversify a private equity portfolio ... 9

3. TARGET PORTFOLIOS BASED ON HISTORICAL RETURN ANALYSIS ... 13

3.1. Strategy diversification ... 13

3.2. Stage diversification ... 15

3.2.1. V C returns by stage... 15

3.2.2. BO returns by fund size ... 17

3.3. G eographic diversification ... 18

4. CHALLENGES TO DIVERSIFICATION IN A PRIVATE EQUITY PORTFOLIO...21

4.1. Difference in risk/return by quality of managers in the portfolio... 21

4 .2 . A ccess lim itations ... 24

4.3. H um an resource constraint... 26

5. LIMITED PARTNERS' APPROACH ... 28

5.1. Survey of sophisticated institutional investors ... 28

5.2 . Investm ent trends ... 30

5.2.1. Portfolio construction ... 30

5.2.2. D iversification by strategy ... 31

5.2.3. Diversification by stage or size ... 33

5.2.4. Diversification by geography ... 35

5.2.4.1. Diversification within the non-US portfolio ... 37

5.2.4.2. Global versus country specific funds ... 38

5.2.4.3. Reasons for non-US investment program ... 42

5.2.5. Investor constraints in achieving diversification in their portfolios...44

6 . C O N C L U SIO N ... .... ... . ... 4 7 R eferen ces ... ... ... . ... 5 2 F IG U R E S ... .... ... 53 A P P E N D IX A ... ... ... .... ... 63 APPENDIX B... .. ... 64 A PP E N D IX C ... .... ... ... ... 65 A P P E N D IX D ... 66 A PPEN D IX E ... ... .... . :.. ... ... 67

1. INTRODUCTION

Institutional investors with large pools of capital to manage typically utilize modem portfolio theory (MPT) to construct an asset allocation designed to produce over

the long term a target return for a given level of risk. Private equity often is included in these portfolios because it is viewed as having low correlation with other asset classes such as public equities, fixed income and real estate, and MPT models often show that allocations to private equity will increase expected returns through diversification. This same analysis, however, is less frequently used for purposes of diversification within a private equity portfolio.

This paper considers whether diversification tools such as MPT can be applied effectively in private equity programs and whether sophisticated investors are designing and managing their private equity portfolios to achieve targeted diversification. The research involved both quantitative and qualitative analysis. Historical fund returns across different investment categories were analyzed for expected risk, return and correlation. In addition, a qualitative assessment of the investment programs, policies and processes of sophisticated private equity investors was made based on data gathered through a series of interviews with ten long-term institutional investors in private equity.

Because of the limited time series of historical return data for private equity, it does not fit well in a MPT mean variance based model. Despite this shortcoming, the research suggests that some level of diversification within a private equity portfolio would be beneficial. However, while diversification within a private equity portfolio, in theory, should provide higher risk-adjusted returns for investors, the application of diversification strategies within this asset class is problematic. Private equity investors

cannot "invest the index" as is possible with marketable securities. The reported private equity indices themselves are skewed toward the higher performing funds in the index. In order to build and maintain a portfolio that is capable of achieving index-level or better returns, investors must consistently access strong performing managers. Moreover, early access to new managers whose positive performance will likely persist over multiple funds is critical.

This need to access high quality managers requires organizations to deploy significant resources in their pursuit. Private equity is a relationship-based asset class, and without sufficient human capital to identify and build relationships with good managers, investors will face difficulty achieving their target exposure to private equity, and consequently, their target returns. Strict diversification policies within a private equity mandate further strain investor's resources and could drive investors to invest in lower performing managers in order to achieve a desired level of diversification.

To understand how sophisticated investors are diversifying their portfolios, detailed interviews were conducted with ten private equity investors with significant and long-term portfolios. These investors included endowments, foundations, corporate pensions and public retirement plans. The data collected from these interviews identified certain trends across the group and with respect to specific classes of investors. For example, it is apparent that many investors, particularly university endowments, avoid

formal diversification policies and instead invest on a purely opportunistic basis. Other investors, including the corporate pensions and public retirement plans, are managing portfolios within a diversification policy mandate. However, these formal policies often utilize permissible ranges of exposures to accommodate over- or underweighting in a

given area in order to permit the investment officers to focus investments with the most promising managers.

While it appears that best practices across the group call for flexibility in

managing a private equity program, investors still pursue some level of diversification in their portfolios. With the surveyed group, diversification is mainly achieved through exposure to various managers, strategies, stages and geographies. All investors maintained relationships with a number of firms -- ranging from 12 to 70, with an average of 48 relationships. With respect to strategy diversification, investors reported on average actual exposure by market value of 70% to buyouts and 30% to venture capital. Within these strategies, the endowments and foundations reported an investment bias toward smaller buyout funds and early stage venture capital funds, while the pension and retirement plans reported a current overweighting to larger buyout funds and no investment bias by venture capital stage. With respect to geographic diversification, only three investors reported a formal non-US allocation, but almost all investors reported actual non-US exposure. These investors' portfolios are weighted by market value on average 80% US and 20% non-US exposure.

This paper begins in Section 2 with an analysis of traditional asset allocation theories and the various ways to diversify a private equity portfolio. Section 3 presents the results of quantitative analysis of expected risk/return profiles of diversified private equity portfolios and correlations among different categories of private equity. Section 4 describes the challenges that investors face in attempting to implement diversification policies. Section 5 then summarizes the data gathered from the investor interviews. This section identifies how these institutions are diversifying by strategy, stage and geography,

with particular emphasis on their approach to non-US investing. This section ends with a discussion of the constraints these investors face in managing their private equity

portfolios in the context of target private equity and subasset class allocations. Finally, Section 6 summarizes the findings and presents best practices from the surveyed investors.

2. DIVERSIFICATION IN PRIVATE EQUITY PORTFOLIOS 2.1. Traditional asset allocation

Modem portfolio theory (MPT) suggests that investors can create an optimal portfolio of investments, with varying degrees of expected risk and return, by combining different types of investments according to their correlations to one another. This approach underlies the typical asset allocation approach of numerous institutional investors such as pension and retirement plans, endowments and foundations. These institutions typically invest in a mix of asset classes, including public equities, fixed income and alternative asset classes (e.g., private equity, real estate and absolute return funds). These asset classes often are further diversified by geographic region, with allocations to both developed and emerging markets. Many such organizations are advised by internal or external consultants who model their portfolios for a given risk and return level to support the organization's long-term liabilities or payout obligations (e.g.,

2.2. Asset allocation applied to private equity portfolios

The intention behind MPT is to maximize return for a given level of risk. In theory, MPT should apply within each asset class of an investor's overall portfolio. For example, a typical institutional investor's public equities portfolio will contain a mix of domestic and international equities, with exposure to large-, mid- and small-cap stocks. Similarly, a bond portfolio may be diversified by duration and credit rating. Investors typically employ some level of diversification in their alternative asset classes, although the degree of diversification varies greatly among investors. Whether diversification within an alternative asset class portfolio is appropriate could be disputed for a variety of reasons. This issue applies to all types of alternative assets, although this paper will focus on private equity investing.

MPT is most useful for efficient markets in which an investor is able to invest in securities in the index such that its portfolio characteristics mimic the index. Unlike investing in public stocks, private equity interests are not traded on any public exchange.' Investments depend on access to private equity managers, and access is based on

relationships between the institutional investors and the private equity firms. Moreover, returns on private equity depend on the quality of the managers selected, and therefore, by the ability of investors to access top tier managers. In addition, MPT is based on the assumption that returns occur in a normal distribution. This is not true with private equity, which produces skewed returns with high kurtosis. Therefore, MPT's use of mean variance analysis applied to private equity is suspect.

1 In recent years, there have been securitizations of private equity portfolios and the emergence of

secondary sales of individual interests in private equity funds. However, this industry is still young and for purposes of this discussion, is not viewed as providing an efficient market for accessing private equity minvestments.

As discussed in Section 4, performance of a private equity portfolio is largely influenced by the quality of the managers in the portfolio as opposed to strategic portfolio design. Many factors constrain investors from building a high performing private equity portfolio. These include limited access to the best managers, limitations on how much capital can be deployed with these managers, the illiquid nature of private equity and the lack of any efficient trading market. Staffing constraints present additional challenges. Not only do many investors lack a sufficient number of investment professionals to manage their programs, but many have difficulty attracting and retaining highly skilled professionals capable of identifying and securing high quality managers. Therefore, while investors may attempt to use MPT as part of their diversification strategy, they must understand that the resulting portfolio design may be impossible to construct.

Given these challenges, some investors avoid attempts to create optimal portfolios within private equity and plan for diversification only at the total portfolio level. This approach may not be unreasonable given the correlation of private equity, as well as the venture capital and buyout subasset classes, with long-term public equities and bonds.2 Moreover, private equity often is a small portion of an investor's total portfolio relative to public equities and fixed income securities. Avoiding diversification within this asset class may be acceptable, although it could result in concentration risk for that portion of the total portfolio. As such, most investors will attempt to provide some form of

diversification in their private equity portfolios.

2.2.1. Ways to diversify a private equity portfolio

Absent portfolio diversification, an investor might subject itself to unacceptable concentration risk, which could significantly impact total portfolio returns. To mitigate

this risk, there are a number of ways to introduce diversification into a private equity portfolio. In the first instance, most investors will invest in a number of private equity partnerships managed by different firms, which reduces manager concentration risk. In

addition to manager diversification, there are five principal areas by which portfolios can be diversified: (i) vintage year, (ii) industry, (iii) strategy, (iv) stage and (v) geography.

These approaches are discussed briefly in the following paragraphs, with more detailed analysis of the last three in later sections of this paper.

Vintage year. Private equity investment funds usually are structured as limited partnership agreements, with the private equity manager serving as the general partner and outside investors taking limited partnership interests. These investment funds have durations of 10 years of more, with the manager typically investing the funds in portfolio companies during the first two to four years, and the portfolio maturing and producing realizations in the later years. Most private equity managers will raise a new fund every three to four years, and the year a fund is formed is called its "vintage year." The relative performance of a private equity fund customarily is measured against the performance of its vintage year peers.

Returns of private equity funds tend to be cyclical because the success of their underlying portfolio companies depends on the relative health of the public stock and debt markets. Accordingly, it is important for private equity investors to maintain appropriate time diversification in their portfolios, which is achieved with exposure across many vintage years. Investors, however, cannot effectively time private equity markets by making selective bets on vintage years. Because of the long-term nature of private equity investments, investors cannot know at the outset whether a particular

vintage year will perform well. Therefore, private equity investors usually will invest in new partnerships every year knowing that some vintage years will perform better than others.

Industry. Investors can provide diversification by industry within their private equity portfolios. Absent the use of sector focused investment funds, this diversification is occurring at the portfolio company level (i.e., looking through the investment funds to their underlying exposures). This type of diversification is harder for the investor to control because most private equity partnerships, with the exception of sector focused funds, will not require specific levels of exposure to given industries. In addition, inherent in the asset class is the focus on growth investing, particularly with respect to venture capital investing - buyouts can be growth and/or value focused. As such, venture capital portfolios tend to be heavily exposed to technology industries such as information technology, communications, healthcare and life sciences. Buyout funds typically are more diversified across major industry sectors such as consumer/retail, industrial, energy, media/communications, etc. Thus, an investor's industry diversification may depend on the relative weighting in the portfolio between venture capital and buyout investments.

Strategy. After vintage year diversification, one of the primary forms of diversification in a private equity portfolio is the mix of investments by strategy, including venture capital, buyouts and special situation funds such as distressed and mezzanine debt. Given the relative size of these industries, meaningful diversification by strategy usually is sought with a mix of venture capital and buyout funds, although many investors also include special situations exposure either as part of their private equity

3 _{A related issue is the inability of most investors to jump in and out of the private equity asset class} without damaging the relationships they have with private equity firms. It wou!d be difficult for an

portfolio or another asset class within the total portfolio. As discussed in detail in Section 3.1, there is low correlation between the returns of venture capital and buyout funds, so investors can design a portfolio with both investment strategies to reduce risk and increase expected returns.

Stage. Investors can further diversify within venture capital and buyouts by stage of investment. In venture capital, this typically is achieved through investments in early stage, late stage, diversified venture and growth equity funds. In buyouts, diversification can be sought through investment across small, mid-market and large buyouts, with fund size as a proxy. VentureXpert categorizes buyouts as follows, based on total capital commitments: small - less than $250 million; medium - $250-500 million; large - $500 million to $1.0 billion; mega - greater than $1.0 billion.4 _{However, funds sizes have}

increased dramatically during the past five years, with many purported mid-market funds now over $1.0 billion in commitments, large buyout funds in the $2.0-5.0 billion range and mega-buyouts in the $5.0-10.0 billion range. Diversification by stage is discussed further in Section 3.2.

Geography. Private equity is not limited to the US market. Many investors diversify their portfolios with commitments to both US and non-US private equity funds. The primary markets for non-US private equity are Europe, Israel and the Asia Pacific region. Europe has the most developed non-US private equity market, although the venture capital industry in Europe significantly lags that of the United States. Israel offers primarily a venture capital market, although it is closely tied to the US venture capital industry given the approach of many Israeli venture capitalists to transition Israeli start-ups to the United States. Asia, as well as India, is still an emerging market for 4 _{VentureXpert online glossary and methodology tools.}

private equity, although there has been activity in these regions for many years. As discussed in more detail in Section 3.3, the benefits of geographic diversification differ depending on the region and subasset class targeted.

3. TARGET PORTFOLIOS BASED ON HISTORICAL RETURN ANALYSIS As mentioned above, investors often seek diversification in their private equity portfolios, but without the strict employment of MPT. One can analyze on a theoretical basis how such diversification will produce an acceptable risk/return profile for a

portfolio. However, as mentioned earlier, an investor's ability to achieve this portfolio is limited by a variety of factors, including access to high quality managers, resources needed to investigate and perform due diligence on managers and limitations on the ability to deploy large amounts of capital with the chosen managers. Regardless, this section investigates the theoretical basis for considering diversification, which investors may then attempt to introduce into their portfolios on a less formal basis.

3.1. Strategy diversification

In order to assess the benefits of combining venture capital and buyout

investments, the historical since inception IRRs for US venture capital and buyout funds in vintage years 1985-2000 were reviewed.5 While this sample is extremely small and

lacks sufficient time coverage, a comparison of the returns suggests that there is low correlation between the two subasset classes. Figures 3.1 and 3.2 show the vintage year pooled mean returns, respectively, for the entire universe tracked by VentureXpert and

for the top quartile returns of that universe. As shown in the Figures and in Table 3.1

' Return data from VentureXpert. Vintage years prior to 1985 had limited data, and vintages 2001 and

below, the two strategies have low negative correlation, which indicates that investors would benefit from diversification at this level.

Table 3.1 BO pooled Vintages 1985-2000 mean Average/Expected Return 14.97 Standard Deviation 12.70 Variance 161.41 Covariance -52.15 Correlation BO and VC -0.18 Correlation:

w/ 5-year S&P 500 returns (1980-2000) -0.06 w/ 5-year NASDAQ returns (1980-2000) -0.29 w/ 5-year ML Bond index returns (1980-2000) 0.52

Source: VentureXpert (returns as of March 31, 2005); Bloomberg

VC pooled mean 27.56 24.93 621.59 0.28 0.53 -0.43

In addition, shown below is the efficient frontier using these data series. As the graph demonstrates, the all buyout portfolio has the lowest risk profile, but the returns are lower (15% expected return and 12.7% standard deviation), while the all venture capital portfolio has the highest return expectation, but also the highest risk profile (25%

standard deviation and 27.6% expected return). Combining these two investments theoretically produces an optimal set of portfolios depending on the risk/return characteristics sought by the investor. Point X on the graph identifies the portfolio weighted 52% buyout and 48% venture capital, which yields approximately the same level of risk (12.68%) as the all buyout portfolio, but with a substantially higher expected return (21%). Investors with an even higher risk tolerance could move further out on that frontier by increasing their exposure to venture capital and approaching expected returns

in the high twenties closer to the all venture capital portfolio. Similar results were found using total value to paid in capital return multiples.6

US VC-BO Portfolio Risk/Return

100% VC 28.00 26.00 24.00 22.00 18.00 -16.00- 1600100% _{100% BO} BO 10.00 11.00 12.00 13.00 14.00 15.00 16.00 17.00 18.00 19.00 20.00 21 Risk (SD) .00 22.00 23.00 24.00 25.00 26.00

Source: VentureXpert; returns as of March 31, 2005

3.2. Stage diversification

Investors can further diversify their portfolios within a strategy by stage of

investment. In venture capital, this typically results in a mix of early stage, late stage and diversified or balanced funds. In the buyout arena, this is usually accomplished with a mix of small-, mid- and large-buyout funds, which often correspond to small, medium and large fund sizes, which is how they are discussed in this paper.

3.2.1. VC returns by stage

Analyzing VentureXpert data for US venture capital vintage years 1985-2000, it appears that there are significant differences in return and risk expectations for seed, early, late and balanced venture capital funds. As shown in Table 3.2, early stage funds appear to have the highest return and highest risk expectations, with late stage having the lowest

See Appendix A.

1 -

---US VC-BO Risk/ReturnPortfolio

--expected risk/return profile. This also is evident in the plot of venture capital returns by stage shown in Figure 3.3.

Table 3.2

US Venture Capital Returns

Pooled mean return (IRR)

Vintages (1985-2000) seed early late balanced

Average/expected return 20.66 37.67 18.33 21.25

Standard Deviation 37.05 38.97 18.31 18.09

Source: VentureXpert; returns as of March 31, 2005

Table 3.3 sets forth the correlation data for the various venture capital stage funds. The data shows the highest correlation between seed and early stage funds and the lowest correlation between early and late stage funds. Not surprisingly, the balanced stage funds show fairly strong positive correlation with each of the other stages. This data suggests that investors may benefit from including a general mix of funds by stage in their portfolios, particularly with exposure to early stage funds.

Table 3.3

Correlation Matrix (1985-2000) seed early late balanced

Seed 1.00

Early 0.71 1.00

Late 0.58 0.35 1.00

Balanced 0.65 0.65 0.44 1.00

Correlation with:

S&P500 rolling 5-year -0.03 0.31 0.55 0.51

ML Master Bond index rolling 5-year -0.23 -0.41 -0.16 -0.06

NASDAQ rolling 5-year 0.03 0.40 0.65 0.55

Another interesting trend in the data is the inverse relationship between vintage year performance and the number of funds raised in the year. This suggests that heavy

fundraising environments might signal an underperforming vintage year. However, it would be impractical to cost average investment pace by vintage year in order to mitigate

exposure to underperforming vintage years. In particular, should investors pull back from investing during heavy fundraising environments, they might lose access to the managers' whose funds they declined.

3.2.2. BO returns by fund size

Buyout funds were analyzed by fund size, with the categories as follows: small funds of less than $250 million, medium size funds of $250-500 million, large funds of $500 million to $1.0 billion, and mega funds of over $1.0 billion. Given that mega funds, particularly multi-billion dollar mega funds, have become a more recent phenomenon, the data on them is very limited. Accordingly, the results with respect to mega funds would seem unreliable and are for the most part ignored in this discussion. As shown in Table 3.4, the data suggests that medium size funds produce the most attractive risk adjusted returns, although large funds produced the highest expected returns. This also is evident in the plot of returns by stage shown in Figure 3.4.

Table 3.4

US Buyout Returns

Pooled mean return (IRR)

Vintages (1985-2000) small medium lar2e mesa

Average/expected return 12.42 13.14 15.32 13.19

Standard Deviation 18.13 7.93 15.27 10.99

Source: VentureXpert; returns as of March 31, 2005

As shown in Table 3.5, the correlation of small and medium sized funds and the correlation of large and mega funds is fairly high. As expected, the correlation of both small funds and medium sized funds to large sized funds is low. This suggests that diversification by fund size could be beneficial if an investor could access quality small or medium funds and large funds. The buyout data also suggests an inverse relationship between number of funds raised in a vintage year and performance of the vintage.8 Table 3.5

Correlation Matrix (1985-2000) small medium large mesa

Small 1.00

Medium 0.43 1.00

Large -0.20 0.22 1.00

Mega 0.46 0.37 0.46 1.00

Correlation with:

S&P500 rolling 5-year 0.22 0.42 0.10 0.44

ML Master Bond index rolling 5-year 0.39 0.23 0.14 0.09

NASDAQ rolling 5-year 0.00 0.31 0.06 0.38

Source: VentureXpert (returns as of March 31, 2005); Bloomberg

3.3. Geographic diversification

To evaluate the impact of geographic diversification in a private equity portfolio, the historical since inception IRRs of US and European venture capital and buyout funds for vintage years 1985-2000 were reviewed for expected return, expected risk and correlation.9 Table 3.6 presents the summary results.

8 See Appendix C.

Table 3.6

US EU US EU

Vintages 1985- pooled pooled US top EU top bottom bottom US EU

2000 mean mean quartile quartile quartile quartile median median

Venture Capital Average/Expected Return 27.56 9.93 29.50 11.62 -1.08 -3.61 11.13 4.16 Std. Deviation 24.93 12.65 25.67 7.89 8.23 5.29 12.13 6.18 Variance 621.59 160.14 659.11 62.20 67.70 27.94 147.18 38.24 Covariance 204.49 87.89 31.62 34.59 Correlation 0.79 0.46 0.78 0.49 Buyout Average/Expected Return 14.97 14.74 18.31 19.81 2.98 3.80 10.66 9.63 Std. Deviation 12.70 10.17 9.45 10.45 6.02 5.39 7.22 5.86 Variance 161.41 103.50 89.31 109.23 36.29 29.01 52.09 34.30 Covariance -26.90 -18.43 22.18 8.63 Correlation -0.22 -0.20 0.73 0.22

Source: VentureXpert; returns as of March 31, 2005

US venture capital funds produced significantly higher returns than their European peers, albeit with correspondingly higher expected risk. This holds true with respect to the pooled mean returns as well as at the median and the top and bottom quartile returns. Only with funds in the top quartile did European venture capital returns produce expected returns close to US median returns. Therefore, there seems to be little argument from a return perspective for diversifying a predominantly US-based venture capital portfolio with European venture capital investments, unless one would expect to access the best European managers.' 0 In addition, there appears to be high correlation of returns between the US and European venture funds, further supporting an argument that geographic diversification among US and European venture capital funds is inadvisable except on an opportunistic basis.

10 While overall European venture capital returns have been unimpressive, there is reason to invest in this

space on an opportunistic basis. In any given vintage year, there were funds that produced exceptional returns. For example, in vintage years 1995-2000, the maximum fund IRRs exceeded 100%.

On the other hand, European buyout funds have performed as well or better than US buyout funds, with similar risk levels. In addition, the correlation of US and

European buyout returns is low, indicating that an investor could provide beneficial diversification in its buyout portfolio with a mix of US and European buyout funds. Shown below is the efficient frontier representing the portfolio of US and European buyout funds. Point X on the frontier represents the expected risk and return for a portfolio weighted 82% US and 18% European buyout funds. This portfolio would have an expected return of 14.93% with standard deviation of 10.17%. This return is only four basis points lower than the all US portfolio return, but the risk level is approximately 250 basis points lower. To the extent an investor has good access to top quartile buyout funds, the excess return through geographic diversification is even higher, although in this case, the data suggests that investors would target a predominantly European portfolio given higher historical top quartile buyout returns in Europe than in the United States.11

BO Portfolio Risk/Return 15.00 100% US 14.95 -14.90 14.85 14.80 100% EU 14.70 6.00 7.00 8.00 9.00 10.00 11.00 12.00 13.00 14.00 I. Risk (SD)

Source: VentureXpert; returns as of March 31, 2005

11 See Appendix D. Note that based on return multiples, as opposed to IRRs, US top quartile buyout funds outperformed European top quartile buyout funds.

4. CHALLENGES TO DIVERSIFICATION IN A PRIVATE EQUITY PORTFOLIO While the diversification strategies discussed above in theory should provide higher risk adjusted returns for investors, in practice they would be quite difficult to

achieve. There are a number of factors that limit an investor's ability to achieve a targeted diversification strategy without sacrificing the quality of the managers selected

for the portfolio. First, there is no index into which an investor can invest. Therefore, investors cannot invest evenly across the universe of private equity funds in order to achieve an "index" return. Investors will be limited by the managers whom they can access. This is compounded by the fact that most investors do not have access to all of the best performing managers. Moreover, private equity funds are fixed in size, and usually have large bases of limited partner investors. Thus, it is difficult for any one investor to commit substantial amounts to a select group of funds. Therefore, if an investor is mandated to achieve a certain exposure level within strategies, stages or geographies, the investor might be forced to invest in second tier funds to meet its targets. This likely would result in lower returns and increased volatility in the portfolio.

4.1. Difference in risk/return by quality of managers in the portfolio

As mentioned above, private equity investors cannot invest in every venture capital or buyout fund raised. This indicates that investors cannot easily construct their portfolios to achieve the returns reported by providers such as Venture Economics and Cambridge Associates. However, the data reported by these providers may not be fully representative of the asset class. The providers may not have access to the performance results from every fund. The index also is limited by survivorship bias. Funds that perform poorly and are terminated early drop out of the index. This is similar for firms

that fail to raise successive funds due to poor performance in earlier funds. As a result, the index is skewed toward better performing funds. Another challenge discussed later in this paper is the heavy human resource commitment required for investors to access

attractive managers.

Types of index measures. Even within the index, there is a significant difference in performance between the best performers and the worst performers. To best

understand this, one first must appreciate the different ways that a private equity index return can be reported: a simple average or mean, a median and a pooled mean. As reference for the discussion following, Figure 4.1 shows the mean, median and pooled mean returns for US venture capital funds in vintages 1985-2000.

The most common measure of central tendency in a distribution is the average or mean. Under this measure, a simple arithmetic average of all the individual returns of the funds in the index is calculated. With respect to private equity returns, however, an average or mean return does not take into account the size of the cash flows that produce each individual fund return. Therefore, the performance of a $50 million fund would be given the same weight in the mean as the performance of a $500 million fund.12

VentureXpert indicates that the average or mean return may be more appropriate for smaller sample sizes or samples where the distribution of returns is relatively normal.13 If the returns are skewed either more positively or more negatively, the mean return will be similarly skewed. Given these issues, most investors do not use a simple average or mean to report private equity index returns.

12 An alternative to this is a capital-weighted return, which weights the returns by fund size. However, the

capital weighted return does not take into account the timing of the cash flows, so it is not typically used by investors.

A second measure of private equity index performance is the median return of the index. The median return is the middle return of all fund returns in the index. Half the returns in the index are above the median return and half are below the median return. If the index reported a fairly normal distribution of returns, the median and the average would be very close. However, if the index is skewed (as private equity typically is), the median will be less skewed than the average. VentureXpert suggests that the median will mitigate the impact of outlier performance in the index and might be more appropriate for larger sample sizes.14

A third measure of private equity index returns is the pooled mean return of the index. The pooled mean method captures the timing and scale of the cash flows of all funds in the index. It treats all the cash flows of the index funds as cash flows of a single fund representing the universe. Based on these "pooled" cash flows, an IRR or similar end-to-end cash flow weighted return (versus a time weighted return used in public index returns) is calculated. The drawback of this calculation is that larger cash flows will influence the index performance more than smaller cash flows. This means that outlier performance will skew the returns in the direction of the outliers. This effect is

compounded when the outlier performance occurs in funds that are themselves very large, with very large cash flows. For example, if a portfolio contains both small buyout funds of less than $250 million in commitments and large or mega buyout funds with over $1.0 billion in commitments, the large funds will have a greater impact on the pooled mean return. Venture Economics suggests that the pooled mean return is used by many investors because it is viewed as closely mimicking the performance of their own

portfolios.15 _{As evident in Figure 4.1 and discussed further below, investors who use the}

pooled mean return as the benchmark for their portfolio's performance may be

overestimating the potential performance of their own portfolios because of the pooled mean return's tendency to skew toward the outliers in the index.

Variations ofperformance within the index. Figure 4.2 presents, for the full index of funds, the pooled mean return, top quartile return, bottom quartile return and median return for US venture capital funds for vintage years 1985-2000. As is evident on the graph, there is significant disparity between the performance of the top quartile and bottom quartile of the index in every vintage year. It also is clear that the pooled mean return tends to skew toward top quartile performance when returns are trending positively and toward bottom quartile returns when returns are trending negatively. The median return is less volatile, but it does not capture to the same extent the impact of positive or negative outlier performance.

4.2. Access limitations

One can infer from this data above that investors cannot duplicate the reported index return (i.e., the pooled mean return) unless they have significant exposure to top quartile funds in every vintage year. As discussed further below, most investors do not have the access or the capital or human resources to commit substantial sums to the expected top quartile performers in every vintage year. These hurdles to achieving targeted returns are compounded when an investor attempts to invest to specific

diversification targets because the investor will have a smaller pool of funds from within each strategy to select.

Impracticality of investing across the index. For vintage years 1980-2000, Venture Economics (in its VentureXpert database) reports that over 3000 US venture capital funds were raised with aggregate capital commitments of almost $300 billion. Table 4.1 breaks down by vintage year the funds tracked in VentureXpert for these years. Even limiting consideration to the smaller subset of funds for which VentureXpert reports performance, an investor seeking to exceed the median performance, theoretically, could be required to invest in mostly first and second quartile funds, in each vintage year.

Table 4.1

US Venture Capital

No. Funds

No. Total reporting

Vintage Funds Commitments performance Pooled Top Bottom

year Raised (millions) in index mean quartile Median quartile

1980 49 $2,151 17 18.8 18.2 13.1 8.8 1981 72 $1,650 22 11 14.8 9.9 0 1982 77 $1,925 29 5.1 9.1 4.2 0 1983 130 $3,732 59 8.3 10.1 5.2 1.2 1984 135 $3,607 66 6.1 11.3 3.8 1 1985 99 $3,777 46 9.8 15.1 8.4 2.2 1986 83 $3,789 44 12.5 12.2 6.3 2.3 1987 109 $4,289 66 13.7 17.1 6.6 -0.6 1988 89 $4,835 46 19 18&5 8.3 1.3 1989 92 $5,243 55 18.3 17.3 10.5 1.7 1990 65 $2,973 23 27.4 25.2 13.7 -0.3 1991 42 $1,904 18 31.2 25.7 18.4 4.4 1992 79 $5,130 27 30.1 31.7 15 10.9 1993 90 $4,914 40 43.9 39.8 12.3 -0.4 1994 106 $8,990 41 39.3 39.8 19.7 4.5 1995 166 $10,084 47 61.6 63.4 22 3.5 1996 145 $12,082 33 86.4 95.8 37.9 1.1 1997 217 $20,711 59 51.3 60.7 19.3 -2.5 1998 246 $30,727 79 13.6 12.1 2.4 -5.6 1999 387 $61,092 108 -11 -0.8 -13.1 -23.1 2000 526 $101,472 115 -6.2 -1.6 -9.7 -16.6

Viewed another way, for an investor to achieve the pooled mean return for its 1998 vintage funds only, it could be required to invest in the 79 reported funds in equal commitment sizes (ignoring survivorship and database reporting bias evidenced by the total number of funds raised that year). To achieve a top quartile return for that vintage, an investor would need to invest in the top 25% of the funds in equal commitment sizes or in some subset of top quartile and other funds in the index in commitment weightings that would skew the portfolio return toward the upper quartile. Extending this analysis across multiple vintage years, which is necessary to assess the feasibility of achieving the index or the top quartile return of the index for a long-term private equity portfolio, an investor would need to make similar investments in each vintage year. Achieving a commitment pace of this magnitude and quality is on its face impractical if not impossible.

Investing in every fund per vintage year is admittedly impractical. This then implies that investors who achieve the index or top quartile returns must be investing in a subset of funds that are more heavily skewed by number and/or commitment sizes toward the top performing funds. This suggests that access to specific investment managers plays a key role in the feasibility of an investor in achieving targeted returns. Access, in turn, can be directly tied to the investor's ability to devote substantial resources to sourcing and maintaining access to top performing funds.

4.3. Human resource constraint

Another constraint in managing a private equity portfolio is human capital. To be successful in private equity investing, institutional investors must build long term

must continuously be seeking new relationships with managers who either have proven track records or may be the future top performers in the industry. This requires a

dedicated investment staff and ideally one that remains with the investor for a long period of time. Relationships are based on the people, and investors who have high turnover will have a harder time maintaining relationships with their private equity managers over the long term.

Staffing resources are important both before and after a private equity investment is made. Human capital is needed to source potential investments, which require

relationship building and analysis of the team and any prior investment performance. Post-investment, it is critical for investors to monitor the performance of the fund and the fund manager. Monitoring is critical for future reinvestment decisions because an

investor will need to evaluate how well the prior investments of the team have performed, whether the team that made the prior investments is the team that will make future

investments, and whether the organization will persist. Building deep relationships with the private equity managers in one's portfolio provides an investor with better access to information about the fund's portfolio companies and the investment professionals of the organization. This in turn facilitates the investor's monitoring role, which otherwise would depend primarily on the limited information provided in the fund financial reports.

Relationship building also is critical for solidifying the investor's place in the firm's limited partner roster. Investors in prior funds typically are given priority access to a firm's future funds. Given the persistence of quality across successive funds, demand for access to subsequent funds of the best managers will increase, and early and continued access to these managers is critical. In addition, investors will want to

successively increase their commitments to their best managers, which is difficult, although more likely to occur in the context of a strong relationship.

5. LIMITED PARTNERS' APPROACH

5.1. Survey of sophisticated institutional investors

As discussed in the preceding Sections, investors face many obstacles to

achieving targeted returns, including the inability to invest the index, the need to access the best managers and the ability to deploy sufficient human capital resources to manage a private equity portfolio. This is compounded when an investor is further burdened with specific diversification requirements such as target exposure by strategy, sector or

geography. Requiring a specific exposure level or targeted suballocations within a portfolio further hinder an investor's ability to achieve a targeted return by deploying capital with only the most promising managers.

However, as discussed in Section 2, investors should benefit from some level of diversification in their private equity portfolios, if it could be achieved without sacrificing quality. To understand how investors are handling this dilemma, a group of ten

institutional investors were interviewed regarding their private equity investment

programs. The group included three corporate pension plans, two public retirement plans, three university endowments and two foundations. These investors have been investing in private equity on average for over 20 years. Their private equity programs are

substantial. The average size portfolio was $1.7 billion in current net asset value, with 48 manager relationships and 170 individual partnership investments.

The data was collected through phone interviews, which tracked a list of questions sent to the investor before the call. 16 Table 5.1 summarizes the primary characteristics of the survey participants.

discussion, the identity of each individual are not disclosed given the confidentiality Table 5.1

Characteristics of Surveyed Institutions

Note that, in Table 5.1 and throughout this interviewed and that individual's organization

of the interview process.17

Age of PE Type of Program Organization (years) Corporate plan 5-15 Corporate plan 16-25 Corporate plan 16-25 Endowment 26-35 Endowment 26-35

Endowment not reported

Foundation 26-35

Foundation 16-25

Public Plan 16-25

Public Plan not reported

AVERAGE 25

Average / Majority Response

Corporate Plan 16-25 Endowment 26-35 Foundation 16-25 Public Plan 16-25 NAV of portfolio ($ millions) 501-1500 1501-2500 2501-3500 501-1500 1501-2500 0-500 0-500 501-1500 1501-2500 2501-3500 1848 1501-2500 501-1500 0-500 2501-3500 The survey questions presented to

No. of Managers 20-40 61-80 41-60 41-60 20-40 10-20 20-40 20-40 61-80 not reported 48 41-60 41-60 20-40 61-80 investors were No. of Funds 0-50 151-250 151-250 151-250 251-350 not reported 51-150 51-150 151-250 not reported 187 151-250 251-350 51-150 151-250 divided into PE staff cons 0-2 3-5 0-2 3-5 3-5 0-2 0-2 0-2 3-5 3-5 3 3-5 0-2 0-2 3-5 five sections. PE ultant yes no yes no no yes no no yes yes yes no no Yfes The first section solicited basic information about the investor's private equity program in terms of total commitments, number of relationships and investments, size of the dedicated private equity team, if any, and whether the investor was using an outside

16 A copy of the survey questions is attached as Appendix E.

7 The order of irnvestor answers within each category of investor also has been altered in each chart in this

consultant to supplement investment activity or policy making for the organization. The second and third sections of the survey collected data on the investor's current program allocations, including suballocations intended to achieve diversification in the portfolio, and how those allocations and suballocations were determined. The fourth section sought information on the investor's targeted risk and return for the program and how that was determined. It further probed whether the investor's private equity team was using quantitative analysis either in designing or implementing the private equity allocation strategy. The last section of the survey sought more detailed information on the investor's activities with respect to geographic diversification.

5.2. Investment trends

The interview data suggested several trends in the way investors or specific classes of investors are managing their private equity investment activities, including diversification within their portfolios. While the data is not statistically significant given the limited sample size, it is enlightening with respect to investor mindset and practice. It should be noted, however, that the trends discussed in this Section 5 and the conclusions discussed in Section 6 relate to sophisticated private equity investors, who employ investment officers with significant experience and skill in private equity investing. For institutions lacking this level of expertise (either in house or through consultants), a different approach to investing may be appropriate.

5.2.1. Portfolio construction

Not surprisingly, none of the investors are utilizing modern portfolio theory to design their private equity portfolios. Instead, most rely on internal or external

class (which is sometimes weighted by risk/return expectations for venture capital and buyouts based on the policy subasset class allocations), which then influences how much

of the organization's total portfolio will be allocated to private equity.1 8

As discussed in more detail in the following sections, the actual composition of these investors' private equity portfolios is driven by the investments chosen by staff, largely driven by quality of the managers. They may invest under the umbrella of a policy allocation, which in many cases gives the team flexibility to invest

opportunistically or within a broad range based on opportunities, or they invest completely on an opportunistic basis.19

5.2.2. Diversification by strategy

All investors have some level of diversification in their portfolios by strategy, primarily with a mix of venture capital and buyout funds. All investors also have exposure to special situation funds such as distressed debt, mezzanine or hedge funds. However, four of the ten investors interviewed report exposure to special situation investments outside of their private equity allocation. In these cases, special situations are either part of a separate alternative marketables asset class or included as part of the fixed income or high yield asset class within the organization's total portfolio.

While all investors report actual diversification by strategy, they do not all manage their portfolios to a target strategy allocation - i.e., as a policy matter, strategy

18 Three investors, two endowments and one corporate pension plan, use internal staff to perform the

quantitative analysis to determine the risk and return of their private equity portfolios. All investors surveyed are using other quantitative analyses in managing their portfolios as a part of due diligence and monitoring existing investments and evaluating new investments (e.g., attribution analysis of managers, benchmark comparisons, deeper analysis of cash flows and returns reported by mangers, etc.).

19 Tighter policy guidelines may be appropriate for investors with less experienced investment officers who may not possess the skills needed to identify good managers, which is imperative for an opportunistic investment approach. A question not addressed here is whether an institution should be active in the private equity asset class without equipping itself with experienced investment professionals either in house or through consultants.

diversification is not required. Table 5.2 shows the breakdown of target and actual allocation by strategy of the ten investors surveyed. As shown, half the group manages their portfolios to target allocations, while the other half invests across strategies on an opportunistic basis. However, reviewing by investor type, we see that the endowments all invest opportunistically without target strategy allocations. A majority of the corporate pension plans and the public retirement plans use target strategy allocations, while the two foundations interviewed were divided on the matter.

Table 5.2

Investor Allocations by Strate2v

Type of Organization Corporate plan Corporate plan Corporate plan Endowment Endowment Endowment Foundation Foundation Public Plan Public Plan AVERAGE Average / Majority Corporate Plan Endowment Foundation Public Plan

* Investor has target, b

Buyout Target Actual opportunistic 98 75 77 60* 49 opportunistic 50 opportunistic 66 opportunistic 75 50 58 opportunistic 65 50 62 50* 70 57 67 Response 68 75 opportunistic 64 opp/50 split 62 50 66

ut actual can be within a b

Venture Capital Target Actual opportunistic 2 20 22 40* 41 opportunistic 50 opportunistic 34 opportunistic 25 30 25 opportunistic 35 40 26 50* 30 36 29 30 opportunistic opp/30 split 45 roader range Special Situation outside Target Actual PE opportunistic in BO no 5 1 no - 10 no opportunistic - yes opportunistic - yes opportunistic - yes 20 17 no opportunistic 0 no 10 12 no 2* 0.5 yes 9 7 split opportunistic opp/20 split 6 no yes no split

Of the investors with target subasset class allocations, two had changed those targets in the last few years, in both cases increasing the target allocation to buyouts versus venture capital; in one case this was coupled with grouping buyouts and special situations

together under one target allocation. In both cases, the policy changes were driven by the investment staff's view that access to sufficient venture capital or special situation

managers was limiting their ability to maintain an allocation close to their targets, albeit within their permissible ranges. Of this same group, four investors anticipate making changes to their target subasset class allocations over the next few years. These potential changes also relate to staff's view on the opportunities available to them in the coming years and their efforts to rationalize the target allocations in the context of the likely opportunities.

The interviews also identified the investors' general approach to determining strategy target allocations or actual exposure through investment activities. All of the investors to some extent came to their current actual allocations through opportunistic investing in the best managers the organization could access. For those investors with target allocations by strategy, the actual exposure heavily influenced the policy decisions regarding target portfolios. Two of the five investors with targets also use policy ranges, which give them further flexibility to invest based on attractiveness of current or staff's view of future opportunities. With respect to those investors with no policy targets, their actual exposure would move in weighting between buyouts and venture capital mostly based on the opportunities.

5.2.3. Diversification by stage or size

Similar to the analysis above regarding diversification by strategy, investors also provided information relating to diversification within their venture capital or buyout portfolios by stage or fund size. None of the investors have policy targets within the

buyout and venture capital strategies. However, five of the 10 investors reported having either actual or tactical biases. These are shown below in Table 5.3.

Table 5.3

Investor Diversification within Strategies

Type of Targets Bias Current Targets Bias Seconda

Organization within BO within BO overweight within VC within VC Bias withi

Corporate plan no no large BO no diversified

-Corporate plan no smaller funds - no -

-Corporate plan no no large BO no

Endowment no smaller funds - no early stage diversifi

Endowment no smaller funds - no early stage growth eq

Endowment no smaller funds - no early stage growth eq

Foundation no no large BO no early stage

-Foundation no smaller funds - no early stage smaller fu

Public Plan no no - no -

-Public Plan no no - no -

-Average / Majority Response

Corporate Plan no no large BO no -

-Endowment no smaller funds - no early stage growth eq

Foundation no smaller funds large BO / - no early stage -/ smaller

/ no Public Plan no no - no - -ry

I VC

Within their buyout portfolios, half of the investors report a deliberate bias toward smaller buyout funds.20 In most cases, investors believe that the smaller buyout funds focus more on value creation through operational improvements, thereby creating greater value for investors than is created on the larger end of the market. This subset of

investors was weighted toward endowments and foundations. On the other hand, the majority of the corporate pensions and public plans and one foundation report no tactical bias within their buyout portfolios, but three of these five investors have a current

20 While investors noted their bias toward smaller buyout funds, generally they were referring to medium and large size funds of less than $1.0 billion in commitmems, as compared to larger buyout funds of greater than $1.0 billion of commitments.

overweighting in very large and mega buyout funds. It is noteworthy that most investors agreed that recent performance in the buyout market was driven by larger buyout funds, and despite the general perception that more value is created at the smaller end of the market, the portfolios with an overweight in large and mega buyouts may have performed better over the past few years. Most investors, however, questioned whether this

performance would persist.

Within their venture capital portfolios, half of the investors reported a tactical bias toward early stage funds. This group consisted of all endowments and foundations

surveyed. The corporate pensions and public plans reported no tactical bias within venture capital. The rationale for the endowment and foundation bias toward early stage was similar to that with respect to smaller buyout funds in that smaller, early stage funds were viewed as the greater value creators within venture capital. Aside from early stage, several investors reported biases toward either growth equity funds or diversified venture capital funds, which were viewed generally as either value creators or attractive on a risk adjusted basis. None of the investors perceived pure late stage funds as particularly attractive.

5.2.4. Diversification by geography

The investor surveys revealed significant data regarding strategies with respect to geographic diversification in their portfolios. Table 5.4 summarizes this data. Similar to the data relating to policy versus actual allocation by venture capital and buyout

strategies, investors were split between those with target policy allocations to US and non-US exposure. In this case, however, only three of the 10 investors surveyed had

policy allocations to non-US investments, while nine reported actual exposure to both US and non-US regions.

Table 5.4

Investor Allocations by Region

United States Non-US

Type of Organization Corporate plan Corporate plan Corporate plan Endowment Endowment Endowment Foundation Foundation Public Plan Public Plan AVERAGE Target opportunistic 80 opportunistic opportunistic opportunistic opportunistic opportunistic 65 85 opportunistic Actual 71 75 75 80 100 85 90 70 not reported 75 80 Target opportunistic 20 opportunistic opportunistic opportunistic opportunistic opportunistic 35 15 opportunistic

Average / Majority Response

Corporate Plan opportunistic

Endowment opportunistic

Foundation opp/65 split

Public Plan opp/85 split

opportunistic opportunistic

opp/35 split

opp/15 split

All of the investors reported actual diversification by region, with the average across the group being 80% US exposure and 20% non-US exposure.2 1 _{Similar to the} responses to strategy diversification, investors generally reported that their actual exposure, combined with a view of potential opportunities, significantly influenced the target allocations for those investors with formal diversification policies. In general, the

21 Investor responses for the actual allocation outside the US included both responses based on fund level exposure (i.e., the NAV of non-US funds) and of company level exposure (i.e., the NAV of the underlying portfolio companies of all funds in the investor's portfolio). Given that many US funds invest outside the United States, the responses of those investors answering based on fund level exposure may have

understated their non-US exposure. This distinction, however, has been onutted in the analysis for purposes of simplicity. Actual 29 25 25 20 0 15 10 30 not reported 25 20

investors' actual practice with respect to non-US investing was driven by opportunities and not a specific strategic design.

5.2.4.1. Diversification within the non-US portfolio

While it is clear that investors believe diversification outside the US is important (as demonstrated by their policy and/or actual allocations), further diversification within the non-US portfolio is less evident. As shown in Table 5.5, most investors' non-US portfolios are heavily weighted to European buyout investments. Every investor

expressed skepticism or avoidance of European venture capital. A secondary, and much smaller, weighting is to Asia, with investors roughly split on their bias toward venture capital and buyouts in Asia. As opposed to the split among investors with respect to strategy diversification, in this area, there was much less distinction between endowments and foundations on the one hand and corporate pensions and public plans on the other.

Table 5.5

Investor Diversification within Non-US regions Type of Organization Corporate plan Corporate plan Corporate plan Endowment Endowment Endowment Foundation Foundation Primary non-US exposure European European European n/a European European European European BO BO BO BO BO BO BO

Public Plan not reported Public Plan European BO

Average /Majority Response

Corporate Plan European BO Endowment European BO Foundation Europear BO Public Plan -/European BO

Secondary non-US exposure BO Asia Asia Asia n/a BO/VC Asia VC Israel BO/VC Asia VC Asia not reported Targets w/in Region no no no n/a no no no no non-US 10% of BO and 5% of VC no Asia split Asia/-split

Bias within Region

Europe Israel Asia/EM

BO BO BO n/a BO BO BO BO

VC

VC

5.2.4.2. Global versus country specific funds

While investors report a clear bias to European buyouts, they have differing views on whether that exposure should be achieved using global funds (which include very large pan-European or pan-Asian funds) or with country-specific funds. As shown in Table 5.6, the investors are about evenly split on their actual investments in and biases toward global versus country funds.